Stock market dips may be on the horizon as Fed looks to hike interest rates to curb inflation

The United States Senate Banking Committee held a hearing today, where lawmakers spoke with Federal Reserve Chairman Jerome Powell to discuss how to help America’s economy ahead of his expected re-nomination for a second term as chairman of the nation’s central bank. What steps can be taken to strengthen

During this hearing, senators focused on what Powell would do to tackle the inflation rate, which rose to a historic 6.8 percent over the previous calendar year. To this end, the Chairman provided the following statement to the Committee:

“I expect this year, 2022, to be a year in which we take steps towards normalization,” Powell said. “That would include raising the federal funds rate. That would include phasing out asset purchases in March, and perhaps, later this year, depending on how things go, to allow ourselves to shrink the balance sheet.” Will start too.”

The move represents a change from the early post-pandemic policy of promoting monetary expansion by encouraging consumers to spend and businesses to invest, explained Itte Goldstein, a professor of economics at the Wharton School of the University of Pennsylvania. newsweek,

Goldstein said these changes could potentially lead to a downside in the stock market as investors become less bullish on market conditions as companies are forced to borrow at higher interest rates. They may also see a reduction in the amount of federal dollars being pumped into the private sector through Fed asset purchases, securities purchases. Goldstein said how deep this dip will be depends on how both the Fed and the Biden administration are handling the matter.

President Joe Biden may soon face heat as he may trade the issue of inflation for the issue of a falling stock market. Here, he prepares to sign the Paycheck Protection Program (PPP) Extension Act 2021 at the White House on March 30, 2021 in Washington, DC.
Photo by Jim Watson / AFP via Getty Images

“You can think of it as if they’re flying a plane and now, they want to land the plane, but don’t want it to be a bumpy ride,” Goldstein said. newsweek, “They are preparing everyone for what is to come because the concern is that if they do something abruptly and suddenly the stock market falls dramatically in a few days, it will be unhealthy for the economy that is headed for. People are going to panic and suffer loss.”

To avoid the kind of panic that could trigger the type of sell-off that shakes the market, the government needs to manage assumptions about the upcoming changes. So far, managing perceptions surrounding the economy has been a challenge for the Biden administration.

While many prominent economists from some of the country’s leading institutions have praised the Biden administration’s performance for swift recovery amid the March slump and kept both the stock market and household spending stable as 60 percent of voters still disapprove of the president. reject the. operation of the economy.

Gary Bertles, an economist at the Brookings Institution, told newsweek With respect to that matter, voters often judge performance by where they have been hurt the most—in this case, by an inflation-related surge in gas and grocery prices.

Goldstein said that if Powell’s above measures result in a fall in the inflation rate, the administration will see that heat redirected toward a potential decline in the stock market. At the end of the day, the nation will continue to confront issues related to the pandemic and its effects on the global economy. As the Biden administration moves forward, its success will depend on its ability to balance future economic constraints, whether it’s inflation or falling stock prices.

“The steps they need to take to bring inflation down are damaging the stock market and then potentially directly hurting the real economy, investments, and so on. At least the cumulative damage, Goldstein told newsweek, “It’s a very treacherous road ahead.”